Flagstar Bank Reports First Quarter Earnings
Also: significant amendments to the FirstSun-HomeStreet merger
Flagstar Bank, N.A. has filed its call report for the first quarter of 2024. Flagstar Bank’s parent company, New York Community Bancorp, is scheduled to announce results at 7 a.m ET today. Because substantially all of NYCB’s operations are conducted through Flagstar and its consolidated subsidiaries, the Flagstar results should be a decent proxy for the NYCB results, at least from a backward looking perspective. The more forward facing discussion of how NYCB’s new management team is thinking about the company will have to wait for the NYCB press release and earnings call.
Here are a few brief highlights from the call report.
A net loss after taxes of $306.5 million.1
Net interest income of $645.9 million, compared to $747.9 million for the fourth quarter of 2023.2
Gross charge offs for the quarter of $91.1 million along with recoveries for the quarter of $9.9 million.3
Total allowance for credit losses of $1.2 billion, up from $992 million at year-end 2023.4
The majority of the overall increase in allowances comes from a $229.7 million increase in allowances for commercial real estate loans.5
Total assets of $112.8 billion, down slightly from around $114 billion at year-end 2023.6
Total deposits of $75.5 billion, down from $81.7 billion at year-end 2023.7
Of those $75.5 billion in deposits:
Total FHLB advances of $23.75 billion, up from $20.25 billion (as reported on the call report10) at year-end 2023.
This is probably clear but it is worth stressing anyways: all of the most recent numbers above are for the quarter ended March 31, 2024. Therefore they reflect a snapshot taken only a few weeks after the closing of the over $1 billion outside equity investment in NYCB, and do not reflect any actions the company’s management may have taken since then.
In NYCB’s proxy statement sent out to shareholders last week, new CEO Joseph Otting wrote, “We understand that regaining your trust and confidence will take time and consistent results. We are confident, however, that the steps we are taking are the right ones.”
FirstSun and HomeStreet Amend Merger Agreement
In January, FirstSun Capital Bancorp, parent company of Sunflower Bank, N.A., and HomeStreet, Inc., parent company of HomeStreet Bank, announced that they had agreed to merge.
Yesterday afternoon the companies announced that they have entered into an amendment to their agreement. The amended agreement includes a few significant changes, summarized here.
Exchange Ratio
Original Agreement: HomeStreet shareholders were to receive 0.4345 of a share of FirstSun for each share of HomeStreet common stock that they hold. This represented a 37% premium to HomeStreet’s closing price on January 12, and an indicative price of $14.75 per share.
Amended Agreement: The exchange ratio has been reduced to 0.3867 per share, an indicative price of $13.58 per share.11
Outside Common Equity Investment
Original Agreement: Along with the merger agreement, FirstSun entered into agreements with outside investors to raise capital to support the merger. In total, $175 million was to be raised from outside investors.
Amended Agreement: FirstSun has agreed to raise an additional $60 million in outside investment, bringing the total amount of outside equity investment to $235 million. FirstSun said in a slide presentation that it has secured commitments for $45 million of the additional $60 million, and has “high confidence” it will obtain commitments for the additional $15 million.
Subordinated Debt Issuance
Original Agreement: N/A
Amended Agreement: FirstSun will issue $48.5 million of subordinated debt qualifying as Tier 2 capital.
Commercial Real Estate Concentration
Original Agreement: N/A
Amended Agreement: HomeStreet will dispose of “approximately $300 million of certain commercial real estate loans.”12 The slide presentation says this will reduce pro forma CRE concentration at the merged bank to 385% (compared to pro forma 424% concentration under the original agreement).
Termination Fee
Original Agreement: Under certain circumstances, HomeStreet would have owed FirstSun $10,000,000, plus certain fees and expenses, if HomeStreet received a better offer and terminated the merger agreement in favor of taking that better offer.
Amended Agreement: Reduces the termination fee if HomeStreet accepts a superior proposal to $2,600,000, plus certain fees and expenses. Note that for other purposes the $10 million termination fee remains unchanged.
Bank Merger Structure and Regulatory Approvals
Original Agreement: HomeStreet, an FDIC-supervised state bank, would merge into Sunflower Bank, an OCC-supervised national bank, with Sunflower Bank surviving. Thus, OCC approval would be required for the bank merger in addition to Federal Reserve Board approval of the holding company merger.
Amended Agreement: Sunflower Bank will first convert from a national bank into a Texas state-chartered bank that is a member of the Federal Reserve System. Thus, OCC approval will no longer be required and both the bank merger and the holding company merger will require Federal Reserve Board approval.13
The companies in their press release explained this final change by saying that they “believe that a Texas state bank charter is the appropriate charter for the combined company’s banking operations since Sunflower Bank is now headquartered in Dallas, Texas.”
This blog post is going to be tedious and include references to the relevant section of the call report in the footnotes because as discussed above although these numbers should be close to the numbers for NYCB on a consolidated basis that will be released later, they won’t necessarily be identical. This net income figure comes from Schedule RI, Item 12 in the call report.
This comes from Schedule RI, Item 3.
This comes from Schedule RI-B Part I, Item 9.
This comes from Schedule RI-B Part II, Item 7.
This comes from Schedule RI-C, Item 1.b.
This comes from Schedule RC, Item 12.
This comes from Schedule RC, Item 13.
This comes from Schedule RC-E, Part I, Memorandum Item 1.b.
This comes from Schedule RC-O, Memorandum Item 2.
This comes from Schedule RC-M, Item 5.a.1. The call report line item describes all of this $20.5 billion as FHLB advances, and the text above follows this approach, but that may not be exactly right — NYCB’s 10-K for the year ended 2023 states that FHLB advances were $19.25 billion and “FRB term funding” was $1 billion.
See slide 6 and the accompanying footnotes in the slide presentation.
The quote in the text above is from the press release. The text of the amendment itself suggests that the amount of CRE loans sold could exceed $300 million if the parties conclude that more is necessary:
Each of Company and Parent shall reasonably cooperate with each other to identify approximately $300,000,000 (based on the principal balance), or such other amounts as the Parties may reasonably determine are deemed necessary to obtain the Requisite Regulatory Approvals, of Company’s or its Subsidiaries’ Commercial Real Estate Loans…
Commercial Real Estate Loans are defined for this purpose as “acquisition, development, and construction lending, and the financing of non-owner occupied real estate held for lease to third parties, including multi-family loans.”
Approval of the Texas state banking regulator now will also be required.